An investment in our Mortgage Funds is in the form of a Floating Rate Note, as the coupon will change with market rates. We do however not use a Libor rate (3m Stibor) as reference rate for our notes. Neither do we use a straight "pass through" rate model. This, we believe, bring advantages for our investors. Let us introduce you to Offered Market Rate, or simply OMR.
Interbank rates can be rather volatile, to say the least. In the case of the Covid-19 turmoil for instance, interbank rates soared for a short period of time, as liquidity dried up and as bank-to-bank credit risk rose markedly (it typically does in terms of market stress). However, since then interbank rates has fallen rapidly, aided by central bank liquidity measures. 3m Stibor has dropped by more than 40bps. This means a substantial blow to traditional FRN holders, as 3m Stibor makes up their coupon base.
At the same time, our reference index, OMR, has kept more or less steady. OMR is the actual lending rate offered to mortgage takers, which will be a better reflection of reality than would listed rates (which are highly negotiable).
We calculate the average actual market rates on each maturity reflected in our portfolios at the current time. The average is based on what rates the seven largest lenders actually used during the previous months. These rates are published monthly, which allows us to calculate our index on a monthly basis. This also allows for monthly coupon payments.
OMR has several benefits for our investors. Below we list a few:
Independence. Investors do not rely on our originator's rate setting, but are pegged to developments in the broader mortgage market.
Transparency. Investors can track the published market rates and, if wanted, cross check our inputs and calculations.
Stickiness. As highlighted above, OMR will most likely prove to be more sticky, and less volatile, than interbank rates. This provides built in interest rate protection in our products. For example, when the Repo Rate was 50bps lower back in 2018, markets rates on mortgages were similar to today.
Asymmetric. Historically, banks have been quicker to raise mortgage rates when market rates go up than to lower them when market rates fall.
Currently favorable. Also mentioned above, OMR "underperformed" 3m Stibor by almost 40bps during the spring of 2020. This spread widening between Stibor and OMR has provided a nice, coupon protecting cushion for our investors, as compared to for instance Covered Bond FRN holders.